Budget 2009 contains important proposals in regard to exempting packaged software from customs duty, on importation, and on excise duty, with regard to domestic supplies, to the extent that such software is purportedly chargeable to the service tax. In other words, these proposals attempt to redress the problem of potential double taxation that arise in regard to such software. Earlier articles in this column had highlighted the problem of double taxation in relation to several transactions. This article however analyses the implications of the proposals and considers the extent to which the issue of double taxation has supposedly been addressed.
In order to better understand the issue, it is worthwhile to consider the manner in which such packaged software was brought to tax under the excise and customs provisions. The excise and customs tariff for Heading 85 23 is in relation to several media for recording of sound or other phenomena, whether or not recorded, and Heading 85 23 80 20 is for information technology software. It must thus be understood that both the excise and customs tariffs are applicable in regard to software resident in tangible media. This is an important point since both the tariffs extend only to excisable goods that are enumerated in the schedules thereunder and not to any other goods. The excise rate is 8 per cent on such software and the basic customs duty is exempt. Thus, both imported and indigenous software are charged to 8 per cent duty.
Now, the Interpretative Notes to the Customs Valuation Rules also stipulate that the charges for the right to reproduce the goods in the country of importation shall not be added to the customs value.
In addition, the relevant general exemption notification under the Central Excise Tariff exempts customised software on media from the duty and limits the applicability therefore to packaged or canned software which is defined to mean software developed to meet the needs of a variety of users and which is intended for sale or capable of being sold off the shelf.
In contrast, the service tax provisions extend to services and not to goods. It is thus worthwhile to look at how the service tax was extended to software in general. The definition of information technology software services inter-alia extends to the following:
Providing (this has replaced the earlier word Acquiring) the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell the information technology software and the right to use software components for the creation of and inclusion in other information technology software products. Consequently, the service tax extended to transfers of right to use such software.
This would mean that if service tax were to apply in regard to providing the right to use information technology software, it would stand to reason that the tax would not apply in a situation of supply of tangible goods, which would not amount to a service at all.
The problem has arisen because there have been several instances where the customs authorities have sought to add the consideration pertaining to the right to reproduce goods to the value of imported goods whereas the service tax authorities have also to tax such consideration to tax, as services. A similar problem could conceivably arise in relation to domestically produced software. It is in this background that the government has amended the Customs Excise tax laws in the Budget to exempt such consideration as is attributable for the transfer of the right to use, reproduce etc., from Customs/ Excise duties.
Notification No. 22/2009-Central Excise and Notification No. 80/2009-Customs are similarly worded and exempt from the excise duty and the countervailing duty respectively , packaged software or canned software from the above duties to the extent of the consideration paid or payable for the transfer of the right to use such software which should be for commercial exploitation including the right to reproduce, distribute and sell such software and the right to use the software components for creation of an inclusion in other information technology software products.
It can be seen that the above Notifications purport to exempt software from the two duties to the extent that they incorporate the consideration which would typically be charged to service tax, as per the relevant part of the definition of information technology service extracted above.
This is further provided through another proviso contained in these notifications which requires either the manufacturer or the importer to be registered under the service tax provisions. Importantly, they do not expressly require the service tax to be paid but only require proof of service tax registration to be demonstrated.
While the above measures would mitigate double taxation in the domain of the federal laws to an extent, such as those between customs/excise and service tax, the real and larger problem of double taxation of such software, to VAT as goods by the State Governments and to service tax as services by the Central Government, continues to remain unresolved and needs to address on priority. The problem cannot be allowed to continue until the introduction of the GST in the country.